All Illinoisans are going to feel the impact of the state’s income tax increase, but experts on both sides of the issue say low- and middle-income families will be hit the hardest.

“It’s especially going to hurt lower-income folks — those who are just starting out in careers or are struggling for whatever reason, who have incomes in the $20,000-$40,000 range,” said John Tillman, chief executive of the conservative think tank Illinois Policy Institute.

“Here’s what people miss when they discuss this tax increase — the incremental cost of this tax increase, comes off of the last dollar saved or spent by anyone.”

After an individual or family pays rent, sales taxes, property taxes and any other expenses, the income tax increase – Illinois’ rate went from 3 percent previously to 5 percent as of Jan. 1 -- will be paid out of what money is left over, Tillman said.

“A family of four making $40,000 is going to have an extra $640 they’re going to have to come up with,” Tillman said. “And for that family, things are very, very tight.”

Income declining

Alfonso Lee, 42, who works in document management at the Willard Ice Building – ironically, the headquarters of the Illinois Department of Revenue -- and said the tax increase was “crazy.” He moved to Springfield from Florida with his two children a year and a half ago, when his wife got a job at Memorial Medical Center.

“It is going to make it harder to take care of our family,” Lee said. “We’ve got two cars, but we’re both riding the bus. Gas is high, taxes are high, we’re riding the bus to make ends meet.”

Lee and his wife make a total less than $50,000 a year, and the tax increase has hit his wife’s paycheck especially hard, he said. The family plans to move back to Florida.

“If they’re going to raise taxes, tax the alcohol and the cigarettes — something that hurts people,” Lee said. “If you’re going to raise taxes, raise it on that. That will help people, instead of hurting them.”

What makes the tax hike even more burdensome on low- and middle- income families is that average personal income has fallen for the bottom 60 percent of Illinois wage earners over the past 40 years, said Ralph Martire, executive director of the Center for Tax and Budget Accountability, which has long advocated for a tax increase, but with progressive reforms to the tax structure.

“Imposing a tax burden on them is difficult with the decline in personal income,” Martire said. “It contributes to the growing income inequality between them and the top 30 percent.”

Between 1979 and 2008, the median wage in Illinois fell 3.2 percent, from $34,757 to $33,654 in 2009 dollars, according to Bureau of Labor Statistics data published by the center. The median wage fell an additional $333 in 2009, to $33,321.

Page 2 of 3 - “It’s very clear from a tax-policy standpoint that Illinois needs more tax equity,” Martire said.

Takes a bigger bite

Despite the additional burden on low wage earners, some think the tax increase was necessary to keep funded the social programs lower-income families rely on.

“If you are a low-income or middle-income family and you have to pick between a tax increase and a cut in services, always choose the increase,” Martire said. “Cutting money to services would be devastating.”

In the light of the fiscal crisis facing Illinois — mounting unpaid bills and a $15 billion deficit — the General Assembly did the right thing in raising the personal income tax from 3 percent to 5 percent, said John Bouman, president of the Sargent Shriver National Center on Poverty Law in Chicago, which advocates for the impoverished in social policy and law.

“The argument is … that the higher need right now is for the money to resolve the crisis,” Bouman said. “By paying the bills and resolving the crisis, we make sure that programs that benefit lower-income people, like human services and public education and health care, are healthy and funded.”

The real problem isn’t with the tax increase, but with the tax structure in Illinois, Bouman said.

“A flat tax of any size disadvantages poor people — it is a bigger bite of their disposable income,” Bouman said. “The whole Illinois tax system needs to be more progressive and more fair to low-income people.”

Flat vs. progressive

Forty-one states tax individual income. Of those, seven, including Illinois, have flat rates -- everyone is taxed at the same rate. The remaining 34 states have progressive tax rates -- taxpayers are grouped into brackets depending on how much they earn. High earners pay higher income tax rates.

“Because it taxes based on people’s ability to pay, the progressive income tax … could be said to be fairer,” Bouman said.

Martire’s center advocates for Illinois to adopt a progressive tax system. However, that would require a state constitutional amendment, which would need to be approved by voters.

“From a capitalist tax policy standpoint, you’re supposed to, in the immortal words of Adam Smith, the founder of modern capitalism, create taxes to put a greater burden on more affluent people rather than low-income people,” Martire said. “The reason you do that is because in a capitalist economy, economic growth goes disproportionately to the top.”

“One thing Illinois had going for it was the flat income tax,” Tillman said. “If you tax the higher income earners more, what that will do is never realize the amount of revenue that they (progressive tax proponents) project and will drive those high-income earners, who are usually the business owners that create jobs, out.”

Page 3 of 3 - Relief for families

In 2009, when Gov. Pat Quinn first proposed an increase in the income tax from 3 percent to 4.5 percent, he built in some progressivity to the tax structure by providing exemptions and deductions aimed at easing the burden on low income earners. But those were left out of the final product this year.

“The major problem with the flat tax rate in this state is the very low exemption level,” said Elizabeth Powers, professor of economics at the University of Illinois. “The main reason why it is burdensome on low-income households is because they have to start paying at such low levels of income.”

A family of four starts paying taxes on any income above $8,000 after exemptions, Powers said. Someone in the bottom 10th percentile of wages in Illinois still earns an average of $16,827, according to the Bureau of Labor Statistics.

The current per-person standard exemption is $2,000. A bill currently before the state Senate would double that exemption to $4,000 beginning in 2012. Another Senate bill would double the property tax credit from 5 percent to 10 percent starting in 2011.

A Quinn spokeswoman said the administration is always looking for ways to provide relief to working families.

Rep. Mary Flowers, D-Chicago, who voted for tax increase, said there has been discussion about introducing a bill to provide relief for working families, but she didn’t know the status of it.

“We did talk about it, and hopefully we will be able to do something about it,” Flowers said. “Quite frankly, we have not recovered from (the burst of the tech bubble in) 2001.”

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Not all pay income tax

Nationally and in the state of Illinois, not everybody pays the income tax.

The federal income tax is a progressive tax. In 2009, 47 percent of taxpayers didn’t have to pay it, either because they didn’t earn enough or because they didn’t owe anything after exemptions and deductions, according to the Tax Policy Center.

In Illinois, where in the average year 6 million residents file tax returns, that number is much smaller.

“About 10 percent of people don’t owe anything in an average year,” Illinois Department of Revenue spokeswoman Susan Hofer said of state income taxes.

Actual numbers on how many people didn’t pay the Illinois personal income tax in recent years weren’t available, Hofer said.

Illinois does not tax retirement income, so pensioners and those living on Social Security will see no effect from the tax increase.